Violin Memory: JP Morgan Likes Focus on Reseller Expansion

By Tiernan Ray

J.P. Morgan enterprise hardware analyst Mark Moskowitz today reiterates a Neutral rating on shares of flash-memory storage equipment vendor Violin Memory (VMEM), writing that the company’s announcement this morning that it will start selling its gear through IT distributor Synnex (SNX) is “a positive development for the Violin story,” less for the revenue it actually brings than for the indication of focus on reseller channels.

More resellers will help Violin increase its sales presence while minimizing its additional operating expense outlay, he thinks:

In coming quarters, we look for Violin to announce additional channel partners, which should help shore up investors’ confidence that the company can build out a meaningful channel presence. We think a larger channel presence could provide Violin greater market coverage without the high costs of supporting a larger direct sales force. OpEx structure could benefit over time. In our view, as Violin likely makes additional channel announcements in coming quarters, the company could start to pare back on its high S&M expense profile. The OpEx churn was a result of the prior management team’s heavy emphasis on the direct channel. Potential of cost take-outs could help this early-stage growth company start to exhibit a glide path toward better cash preservation, which remains a big issue for investors.

Still, Moskowitz writes the company needs to show it can manage its gross profit margin at 55% or better to clear a profit on distributors such as Synnex. He writes “the risk-reward profile of Violin requires incremental revenue growth and cost take-out catalysts to become more attractive.”

The announcement follows the company’s decision earlier this month to appoint Kevin DeNuccio, a networking equipment veteran, to be its new CEO, replacing Howard Bain III, who had been serving on an interim bassi since the departure of Don Balsille back in mid-December.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.